St. Jude Medical's (STJ) fourth-quarter adjusted earnings per share of 92 cents topped the Zacks Consensus Estimate by 2 cents and transcended the year-ago earnings of 86 cents. The adjusted earnings exclude charges (of $75 million) related to restructuring activities of its business segments and centralization of certain support functions. Costs related to impairment of intangibles and inventory write-off for suspension of certain Cardiovascular and Ablation Technologies Division (CATD) offerings were also excluded. Adjusted earnings also excluded certain income tax-related expenses, and legal and other charges associated with field actions in the Implantable Electronic Systems Division (IESD). However, it includes an income tax benefit of $6 million from the federal research and development tax credit.

Profit (as reported) for the fourth quarter dropped 4% year over year to $120 million (or 39 cents a share), as controlled operating expenses were dampened by sluggish sales and a difficult Med-Tech environment.

For 2012, adjusted earnings of $3.48 a share beat the Zacks Consensus Estimate by 3 cents and exceeded the year-ago earnings of $3.28 a share. Profit declined roughly 8% year over year to $752 million or $2.39 a share.

The Minnesota-based medical technology giant noted that only the Atrial Fibrillation business is growing at a healthy pace and the implantable cardioverter defibrillator (ICD) has not lost market share, despite the manufacturing issues of the Riata/Durata leads.

Revenues

Revenues dropped 2% (down 1% in constant currency) year over year to $1,372 million, just ahead of the Zacks Consensus Estimate of $1,370 million. All segments reported disappointing results, especially Cardiac Rhythm Management (CRM) and Neuromodulation units, except the Atrial Fibrillation (AF) business.

For the full year, sales also declined 2% (up 1% in constant currency) year over year to $5,503 million, modestly beating the Zacks Consensus Estimate of $5,501 million. Foreign currency fluctuations lowered revenues by roughly $23 million and $137 million in the fourth quarter and 2012, respectively.

Segment Review

Revenues from the CRM division, St. Jude's mainstay, fell 6% (down 5% in constant currency) year over year to $682 million, indicating sustained softness in the CRM market. ICD revenues slid 3% (down 2% in constant currency) to $422 million and pacemaker sales plunged 11% (down 9% in constant currency) to $260 million.

A still choppy U.S. defibrillator market remains an overhang on St. Jude and its peers Medtronic (MDT) and Boston Scientific (BSX), as reflected by sustained implant volume pressure. ICD volume growth has been hindered by a number of factors, including the Food and Drug Administration (FDA) warning letter.

On a positive note, Atrial Fibrillation revenues climbed 10% (up 11% in constant currency) year over year to $239 million. However, Neuromodulation sales dropped 7% (down 6% in constant currency) to $113 million.

Revenues from the Cardiovascular franchise remained flat at $338 million. Within Cardiovascular, vascular products sales dipped 2% to $186 million. Structural heart product revenues were flat at $152 million.

Margins

Gross margin decreased to 69.5% from 71.4% a year ago. Selling, general and administrative expenses, as a percentage of sales, fell to 32.9% from 39.2% a year-ago.

Research and development expenses (as a percentage of sales) edged down to 11.5% from 12.6%. However, it is worthwhile to note that operating margins increased to 16.4% from 11.2% a year ago, on the back of controlled expenses.

Balance Sheet

St. Jude exited the fourth quarter of 2012 with cash and cash equivalents of $1,194 million, a year over year increase of roughly 21.1%. Long-term debt decreased 6% year over year to $2,713 million.

Outlook

St. Jude has provided its earnings forecast for the first quarter as well as 2013. The company expects adjusted earnings for the year in the band of $3.68-$3.73 per share. For the first quarter, it envisions adjusted earnings in the range of 91-93 cents a share. The current Zacks Consensus Estimates for the first quarter and 2012 are 89 cents and $3.64, respectively.

St. Jude, with a market cap of $12.23 billion, is a leading medical device manufacturer maintaining a solid rate of growth over the past decade. We are impressed by the company's efforts in leveraging its margins by undertaking various restructuring initiatives and controlling expenses. However, competitive pressures and a sluggish CRM market, given the ongoing difficult macroeconomic conditions, continue to be a drag on the company's results.

St. Jude currently carries a Zacks Rank #3 (Hold). Medical products companies such as Unilife Corporation (UNIS), which carries a Zacks Rank #1 (Strong Buy), is expected to do well.
 
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Tickers in this Article: BSX, MDT, STJ, UNIS

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